The age of fiscal socialism

IT IS spring and tax-filing time. Fruit-tree blossoms flutter on to the freshly-cut grass. Completed IRS 1040 forms lie sprinkled on the floor. Taxpayers whistle blithely while they fill in the still uncompleted ones.

Well, perhaps not. The American tax code remains as horribly complicated as ever. But in a country built on a tax revolt it is remarkable that, as the April 17th tax-filing deadline approaches, the United States is gripped by a surge of contentment over tax. Steve Forbes's attempt to become president on the promise of a flat tax went nowhere. Republican Congressmen, even those who believe that government is a sin, are proposing smaller tax cuts than last year. George W. Bush, to be sure, wants a big tax cut; but this seems to worry rather than excite voters. In poll after poll, tax cuts come way down on the list of voters' concerns, somewhere above the cost of Pokemon cards.

Which is, at least when you first look at it, rather odd. As Republicans never tire of pointing out, the federal tax burden now is higher—over 20% of national income—than it was 20 years ago, when Ronald Reagan came to office, promising to slash federal taxes after the success of California's tax-cutting Proposition 13. Last year, the Internal Revenue Service collected $1.7 trillion. This sum was larger than Britain's entire gross domestic product and enough to ensure that America had a budget surplus for the third year running. Why on earth isn't there a clamour to cut taxes?

The popular response is: it's the economy, stupid. Americans are doing so well these days that they don't need a big tax cut. Inflation and unemployment are low; incomes are rising. When Mr Reagan came to office, it was a different story: inflation was 13%; unemployment was 7%; output was stagnant. Tax cuts were then seen as a way to stimulate the economy. That hardly seems necessary now.

There is clearly something in this, and it means that, if prosperity were all there was to it, you would expect demand for tax cuts to rise again as soon as growth starts to falter. But that may not be all there is to it. In three different ways, taxpayers' expectations may be changing so as to mute the tax clamour, at least partly, even after the next downturn.

First, voters may have become more cynical about tax cuts. They have listened to people saying “read my lips, no new taxes” and have reasonably concluded that a politician promising big tax cuts is either lying or cannot keep his promises.

Second, even if voters are just as gullible as ever, they are now, on average, older, nearer retirement and more concerned about the Social Security and Medicare programmes. This concern helps to make sense of what is otherwise a puzzling finding: that nearly everyone thinks taxes are too high, even though no one seems unduly concerned about cutting them (70% said taxes were too high in a recent Economist poll). The explanation is that voters do care about taxes, but are more worried about the solvency of Social Security and the cost of the national debt. It is a triumph of the Clinton administration's ability to associate “tax cuts” in people's minds with “lower social services” and “higher debt burden” even at a time of budget surpluses.

Third, people may no longer judge the weight of their tax burden on the scales of income alone. They also take into account total wealth, including the huge capital gains they have made over the past five years in the stock markets. This may not actually make much sense. With a few exceptions (notably inheritance duties), people's tax bills are based on their incomes. Still, more than half of all Americans now own shares, mostly through pension plans, so it is inevitable that their stockmarket gains make them feel wealthier, and their tax burden lighter. Indeed, if you measure taxes as a share not of income alone, but of income plus the change in households' net worth, the tax burden is falling.

All these are reasons for thinking that taxpayers may be changing their minds about what counts as “too much” tax. It certainly makes any tax revolt harder to foresee. But, in addition to all this, a more fundamental change is reconciling people to their apparently high tax burdens.

Most people aren't paying these high overall taxes. Much of the tax burden in super-capitalist, anti-egalitarian, winner-takes-all America falls on, er, the rich. The middle class and poor are paying less than they used to.

Twenty years ago, America's super-rich—the wealthiest 1% of taxpayers—paid 19% of all federal taxes. Now they pay a third. The share paid by the merely wealthy—the top 5%—has risen from just over a third to just over half during the same period.

Naturally, the middle class and the poor are paying far less. Those with so-called median incomes, the mid-point in the income scale, or the middle of the middle class, now have their lowest income-tax burden since 1966. And families at the bottom are doing even better. The Earned Income Tax Credit—a sort of reverse income tax for the working poor—means that those getting half the median income get paid more in EITC credits than they pay out in income taxes. No wonder the vast majority of taxpayers are not bothered by the increasing tax burden: they are not bearing it.

And the rich can afford to. Earnings at the top have shot up over the past 20 years and, in the age of the longest-ever economic expansion, when the gap between rich and poor has yawned ever wider, few rich Americans are likely to start complaining vociferously about their tax bill getting in the way of that new kitchen in their (second) house in the Hamptons. Besides, the top marginal rate has come down from 70% in 1980 to 39.6%.

In short, the years of tax revolt seem to have achieved a remarkable (and unintended) outcome: in the country thought of as friendlier to the rich than almost any other, there has been a huge swing in the tax burden away from the poor and towards the rich. Marx might have asked for a little more; a few European thinkers will doubtless whimper about the need for a third way. But, fiscally speaking at least, America seems to be making the rich pay. And—except possibly on tax-filing day—almost everyone is satisfied with this new state of affairs.